Sanders Morris Llc

Allegations: THE NASD ALLEGES THAT THE FIRM FAILED TO DISPLAY IMMEDIATELY CUSTOMER LIMIT ORDER IN NASDAQ SECURITIES IN ITS PUBLIC QUOTATION, WHEN EACH SUCH ORDER WAS AT A PRICE THAT WOULD HAVE IMPROVED THE FIRM'S BID OR OFFER IN EACH SUCH SECURITY; OR WHEN THE ORDER WAS PRICED EQUAL TO THE FIRM'S BID OR OFFER AND THE NBBO FOR EACH SECURITY, AND THE SIZE OF THE ORDER REPRESENTED MORE THAN A DE MINIMIS CHANGE IN RELATION TO THE SIZE ASSOCIATED WITH THE FIRM'S BID OR OFFER IN EACH SUCH SECURITY; AND THE FIRM'S SUPERVISORY SYSTEM DID NOT PROVIDE FOR SUPERVISION REASONABLY DESIGNED TO ACHIEVE COMPLIANCE WITH RESPECT TO THE APPLICABLE SECURITIES LAWS AND REGULATIONS, AND THE RULES OF NASD, CONCERNING THE DISPLAY RULE. SPECIFICALLY THE FIRM'S SUPERVISORY SYSTEMS DID NOT INCLUDE WRITTEN SUPERVISORY PROCEDURES PROVIDING A STATEMENT OF THE SUPERVISORY STEP(S) TO BE TAKEN BY THE IDENTIFIED PERSON. Status: Final Sanction Detail: WITHOUT ADMITTING OR DENYING THE ALLEGATIONS, RESPONDENT FIRM CONSENTED TO THE DESCRIBED SANCTIONS AND TO THE ENTRY OF FINDING; THEREFORE, FIRM IS CENSURED AND FINED $10,000 (CONSISTING OF A $5,000 FINE FOR THE LIMIT ORDER DISPLAY VIOLATIONS AND A $5,000 FINE FOR THE SUPERVISION VIOLATIONS) AND AN UNDERTAKING TO REVISE THE FIRM'S WRITTEN SUPERVISORY PROCEDURES. Summary: SMH HAS TAKEN THE FOLLOWING ACTIONS IN CONNECTION WITH THE DISPLAY OF CUSTOMER LIMIT ORDERS. IN APRIL 2003, SMH WITHDREW AS A MARKET MAKER IN THREE SECURITIES THAT ACCOUNTED FOR MORE THAN 75% OF THE TRANSACTIONS IDENTIFIED BY THE NASD. IN ADDITION, SMH CHANGED ITS SYSTEM FOR DISPLAYING LIMIT ORDERS FROM A MANUAL PROCESS TO AN AUTOMATED PROCESS WHICH DISPLAYS CUSTOMER LIMIT ORDER INSTANTANEOUSLY UPON RECEIPT AND UPDATED ITS WRITTEN SUPERVISORY PROCEDURES.

Allegations: NASD RULES 6130, 6955(A) - SMH CAPITAL INC. SUBMITTED ERRONEOUS REPORTS TO THE NASDAQ MARKET CENTER (NMC) IN THAT THE FIRM FAILED TO REPORT TO THE NMC THE CORRECT SYMBOL INDICATING WHETHER IT EXECUTED TRANSACTIONS IN REPORTABLE SECURITIES AS PRINCIPAL, RISKLESS PRINCIPAL OR AGENT; AND THE CANCELLATION OF TRADES PREVIOUSLY REPORTED TO THE NMC; AND REPORTED AN INCORRECT EXECUTION TIME TO THE NMC. THE FIRM TRANSMITTED TO THE ORDER AUDIT TRAIL SYSTEM (OATS) REPORTS THAT CONTAINED INACCURATE, INCOMPLETE OR IMPROPERLY FORMATTED DATA - SUBMITTED INFORMATION IN THE WRONG OATS REPORTS; FAILED TO SUBMIT REPORTS WHEN REQUIRED AND SUBMITTED INCORRECT INFORMATION IN REPORTS. Status: Final Sanction Detail: WITHOUT ADMITTING OR DENYING THE FINDINGS, THE FIRM CONSENTED TO THE DESCRIBED SANCTIONS AND TO THE ENTRY OF THE FINDINGS. FINE OF $10,000.00 PAID IN AUGUST 2008. Summary: NASD RULES 6130, 6955(A) - FIRM SUBMITTED ERRONEOUS REPORTS TO THE NASDAQ MARKET CENTER (NMC) IN THAT THE FIRM FAILED TO REPORT TO THE NMC THE CORRECT SYMBOL INDICATING WHETHER IT EXECUTED TRANSACTIONS IN REPORTABLE SECURITIES AS PRINCIPAL, RISKLESS PRINCIPAL OR AGENT; AND THE CANCELLATION OF TRADES PREVIOUSLY REPORTED TO THE NMC; AND REPORTED AN INCORRECT EXECUTION TIME TO THE NMC. THE FIRM TRANSMITTED TO THE ORDER AUDIT TRAIL SYSTEM (OATS) REPORTS THAT CONTAINED INACCURATE, INCOMPLETE OR IMPROPERLY FORMATTED DATA - SUBMITTED INFORMATION IN THE WRONG OATS REPORTS; FAILED TO SUBMIT REPORTS WHEN REQUIRED AND SUBMITTED INCORRECT INFORMATION IN REPORTS.

Allegations: DURING THE FIRST QUARTER OF 2006, THE FIRM FAILED TO REPORT TO TRACE 397 TRANSACTIONS IN TRACE-ELIGIBLE SECURITIES WITHIN 15 MINUTES OF THE TIME OF EXECUTION. Status: Final Sanction Detail: FINE PAID PRIOR TO OCTOBER 29, 2008. Summary: THE FIRM ENTERED INTO A LETTER OF ACCEPTANCE, WAIVER AND CONSENT RELATING TO THE FAILURE TO REPORT TO TRACE 397 TRANSACTIONS IN TRACE-ELIGIBLE SECURITIES WITHIN 15 MINUTES OF THE TIME OF EXECUTION DURING THE FIRST QUARTER OF 2006

Allegations: NASD RULES 2110, 6230, 6230(A) - SMH CAPITAL, INC. FAILED TO REPORT TO THE TRADE REPORTING AND COMPLIANCE ENGINE (TRACE) 99 TRANSACTIONS IN TRACE-ELIGIBLE SECURITIES WITHIN 15 MINUTES OF THE TIME OF EXECUTION. THIS CONDUCT CONSTITUTES SEPARATE AND DISTINCT VIOLATIONS OF NASD RULE 6230(A) AND A PATTERN OR PRACTICE OF LATE REPORTING WITHOUT EXCEPTIONAL CIRCUMSTANCES IN VIOLATION OF NASD RULE 2110. THE FIRM REPORTED 8 TRANSACTIONS IN TRACE-ELIGIBLE SECURITIES TO TRACE THAT IT WAS NOT REQUIRED TO REPORT. Status: Final Sanction Detail: WITHOUT ADMITTING OR DENYING THE FINDINGS, THE FIRM CONSENTED TO THE DESCRIBED SANCTIONS AND TO THE ENTRY OF FINDINGS; THEREFORE, THE FIRM IS CENSURED AND FINED $7,500. FINE PAID VIA CHECK ON OCTOBER 9, 2009.

Allegations: FROM DECEMBER 2002 THROUGH APRIL 2004, THE FIRM FAILED TO ESTABLISH, MAINTAIN, OR ENFORCE A SUPERVISORY SYSTEM AND PROCEDURES THAT WERE REASONABLY DESIGNED TO DETECT AND PREVENT MARKET TIMING ACTIVITIES THAT CONTRAVENED APPLICABLE MUTUAL FUND PROSPECTUS TERMS. FIRM FAILED TO TAKE ANY SUPERVISORY ACTION AGAINST A REPRESENTATIVE WHO HAD RECEIVED A NUMBER OF "BLOCK LETTERS" FOR EXCESSIVE TRADING ACTIVITY FROM SEVERAL MUTUAL FUNDS TO ENSURE THAT HE DID NIT CONTINUE HIS MARKET TIMING TRADING ACTIVITIES IN THE SUBJECT MUTUAL FUNDS. Status: Final Sanction Detail: FINE PAID IN JULY 2008. Summary: SEE ANSWER TO NO. 7 ABOVE.

Allegations: SECTION 17(A) OF THE SECURITIES EXCHANGE ACT, RULE 17A-4 THEREUNDER, NASD RULES 1031, 2110, 2210(D)(1), 2210(B)(1), 2210(B)(2)(A), 3010, 3110: IN JULY 2000, SMH CAPITAL INC. (THE "FIRM") EXPANDED ITS BUSINESS BY ACQUIRING A CORPORATION, WHICH BECAME ITS PRIME BROKERAGE SERVICES (PBS) DIVISION. THE FIRM BEGAN OFFERING A VARIETY OF SERVICES TO HEDGE FUND CLIENTS THROUGH ITS PBS DIVISION. FROM JULY 2000 THROUGH AT LEAST DECEMBER 2005, THE FIRM FAILED TO ESTABLISH, MAINTAIN AND ENFORCE ADEQUATE PROCEDURES AND SYSTEMS THAT: A) WERE TAILORED TO ENSURE THAT ITS HEDGE FUND, PRIME BROKERAGE SERVICES, AND SOFT DOLLAR ACTIVITIES WERE IN COMPLIANCE WITH THE FEDERAL SECURITIES LAWS AND NASD RULES; AND B) PERTAINED TO SUPERVISION OF EMPLOYEES WHO PROVIDED SERVICES TO FUNDS UTILIZING THE PBS DIVISION'S PLATFORM. AS A RESULT, THE FIRM ALLOWED IMPROPER PAYMENTS OF ABOUT $325,000 IN SOFT DOLLARS TO ONE HEDGE FUND MANAGER. THE FIRM LACKED ADEQUATE PROCEDURES CONCERNING THE CONTENTS OF HEDGE FUND SALES MATERIALS PREPARED AND DISSEMINATED BY THE FIRM AND DISTRIBUTED SALES LITERATURE THAT DID NOT ADEQUATELY DISCLOSE MATERIAL INVESTMENT RISKS TO POTENTIAL INVESTORS IN ACCORDANCE WITH NASD NOTICE TO MEMBERS 03-07. FROM AT LEAST JANUARY 2003 TO DECEMBER 2004, THE FIRM FAILED TO RETAIN CERTAIN E-MAILS AND INSTANT MESSAGES SENT TO AND RECEIVED BY CERTAIN EMPLOYEES IN THE PBS DIVISION. THE FIRM ALSO PERMITTED AN EMPLOYEE OF THE PBS DIVISION, TO ENGAGE IN ACTIVITIES REQUIRING HIM TO BE REGISTERED WITHOUT OBTAINING THE NECESSARY REGISTRATION. IN APRIL 2002, THE FIRM MODIFIED CERTAIN BROKERS' COMPENSATION STRUCTURE SO THAT THEY SHARED IN THE PBS PROFIT POOL, DERIVED IN PART FROM THOSE COMMISSIONS THE FIRM EARNED ON THE FUND'S TRADING. AS A RESULT, CONTRARY TO RESTRICTIONS, FROM APRIL 2002 TO JUNE 2004, THE BROKERS SHARED INDIRECTLY IN THE COMMISSIONS THE FIRM EARNED ON THE FUND'S TRADING BUT DID NOT AMEND THE FUND'S OFFERING DOCUMENT. Status: Final Sanction Detail: WITHOUT ADMITTING OR DENYING THE FINDINGS, THE FIRM CONSENTED TO THE DESCRIBED SANCTIONS AND TO THE ENTRY OF FINDINGS. THE FIRM IS CENSURED AND FINED $450,000, WHICH WAS PAID IN JANUARU 2008. PURSUANT TO ITS UNDERTAKING THE FIRM ENGAGED AN INDEPENDENT CONSULTANT TO REVIEW ITS SUPERVISORY SYSTEMS AND PROCEDURES WITH RESPECT TO ITS PRIME BROKERAGE OPERATIONS. Summary: BY AGREEING TO THE TERMS OF THE ACCEPTANCE, WAIVER AND CONSENT THAT MADE SOUND ECONOMIC SENSE, AND WITHOUT ADMITTING ANY OF THE ALLEGATIONS AND FINDINGS, SMH CAPITAL IS PLEASED TO PUT THIS MATTER, WHICH AROSE IN EARLY 2005, AND RELATED TO MATTERS THAT OCCURRED BETWEEN 2000 AND 2004, BEHIND IT. THE AMOUNT OF THE SETTLEMENT WAS FULLY RESERVED IN OUR REPORTED RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007. SMH CAPITAL STRIVES TO ENSURE THAT IT OPERATES ALL ITS BUSINESSES UNDER BEST PRACTICES AND IN FULL COMPLIANCE WITH ALL REGULATIONS. WE CONTINUE TO REVIEW OUR POLICIES AND PROCEDURES WITH OUR PRIME BROKERAGE AND RELATED HEDGE FUND BUSINESSES TO ENSURE THAT WE REMAIN FOCUSED ON OPERATIONAL EXCELLENCE.

Allegations: ON DECEMBER 28, 2012, AS A RESULT OF AN INACCURATE DEFERRED TAX BALANCE CALCULATION, THE FIRM INACCURATELY CALCULATED ITS EXCESS NET CAPITAL. BASED ON THIS INACCURATE NET CAPITAL CALCULATION, ON DECEMBER 28, 2012, THE FIRM'S BOARD OF DIRECTORS AUTHORIZED A DISTRIBUTION TO ITS OWNERS. IN CONNECTION WITH THE APPROVED DISTRIBUTION, THE FIRM FILED WITH FINRA A NOTICE OF WITHDRAWAL OF EQUITY CAPITAL INDICATING THE WITHDRAWAL WOULD OCCUR ON JANUARY 2, 2013. THE FIRM HOWEVER FAILED TO PROPERLY ACCRUE THIS CAPITAL DISTRIBUTION AS A LIABILITY ON DECEMBER 28, 2012. INSTEAD, THE FIRM WAITED AND REFLECTED THE EXPENSE WHEN THE DISTRIBUTION OCCURRED ON JANUARY 4, 2013. SMH LATER PROVIDED FINRA WITH AN ESTIMATED NET CAPITAL COMPUTATION AS OF JANUARY 4, 2013 BASED ON END OF 2012 AUDITED FINANCIALS THAT REFLECTED THE CORRECT VALUE FOR THE DEFERRED TAX ASSET AND THE DISTRIBUTION. THE REVISED CALCULATION REFLECTED A NET CAPITAL DEFICIENCY FOR THE FIRM THAT REMAINED IN EFFECT UNTIL FEBRUARY 28, 2013. ADDITIONALLY, FROM OCTOBER 1, 2012 THROUGH FEBRUARY 28, 2013, THE FIRM FAILED TO MAINTAIN ACCURATE BOOKS AND RECORDS TO PROPERLY REFLECT THE BOOK BASIS AMOUNTS FOR PARTNERSHIP INTERESTS SOLD IN OCTOBER 2012. CONSEQUENTLY, THE FIRM FILED INACCURATE FOCUS FILINGS FOR PERIODS ENDING OCTOBER 31, 2012, NOVEMBER 30, 2012, DECEMBER 31, 2012, JANUARY 31, 2013, AND FEBRUARY 28, 2013. Status: Final Sanction Detail: TOTAL AMOUNT OF FINE $ 85,000.00. PAYMENT RELASE DATE 01/06/2015. Summary: ON DECEMBER 28, 2012, AS A RESULT OF AN INACCURATE DEFERRED TAX BALANCE CALCULATION, THE FIRM INACCURATELY CALCULATED ITS EXCESS NET CAPITAL. BASED ON THIS INACCURATE NET CAPITAL CALCULATION, ON DECEMBER 28, 2012, THE FIRM'S BOARD OF DIRECTORS AUTHORIZED A DISTRIBUTION TO ITS OWNERS. IN CONNECTION WITH THE APPROVED DISTRIBUTION, THE FIRM FILED WITH FINRA A NOTICE OF WITHDRAWAL OF EQUITY CAPITAL INDICATING THE WITHDRAWAL WOULD OCCUR ON JANUARY 2, 2013. THE FIRM HOWEVER FAILED TO PROPERLY ACCRUE THIS CAPITAL DISTRIBUTION AS A LIABILITY ON DECEMBER 28, 2012. INSTEAD, THE FIRM WAITED AND REFLECTED THE EXPENSE WHEN THE DISTRIBUTION OCCURRED ON JANUARY 4, 2013. SMH LATER PROVIDED FINRA WITH AN ESTIMATED NET CAPITAL COMPUTATION AS OF JANUARY 4, 2013 BASED ON END OF 2012 AUDITED FINANCIALS THAT REFLECTED THE CORRECT VALUE FOR THE DEFERRED TAX ASSET AND THE DISTRIBUTION. THE REVISED CALCULATION REFLECTED A NET CAPITAL DEFICIENCY FOR THE FIRM THAT REMAINED IN EFFECT UNTIL FEBRUARY 28, 2013. ADDITIONALLY, FROM OCTOBER 1, 2012 THROUGH FEBRUARY 28, 2013, THE FIRM FAILED TO MAINTAIN ACCURATE BOOKS AND RECORDS TO PROPERLY REFLECT THE BOOK BASIS AMOUNTS FOR PARTNERSHIP INTERESTS SOLD IN OCTOBER 2012. CONSEQUENTLY, THE FIRM FILED INACCURATE FOCUS FILINGS FOR PERIODS ENDING OCTOBER 31, 2012, NOVEMBER 30, 2012, DECEMBER 31, 2012, JANUARY 31, 2013, AND FEBRUARY 28, 2013.

Allegations: THE APPLICANT FAILED TO REQUIRE TWO AGENTS OF AN INDEPENDENT FINANCIAL ADVISOR ASSOCIATED WITH APPLICANT'S NETWORK TO OBTAIN REGISTRATION AND LICENSING EXAMS PRIOR TO PROVIDING INVESTMENT ADVISORY SERVICES IN TEXAS. THE APPLICANT FAILED TO ENFORCE A SYSTEM REASONABLY DESIGNED TO ACHIEVE COMPLIANCE WITH THE BOARD RULES AND THE TEXAS SECURITIES ACT INVOLVING INVESTMENT ADVISER AGENT REGISTRATION AND FAILED TO DISCLOSE ONE AGENT'S OUTSIDE BUSINESS ACTIVITY INVOLVING INVESTMENT ADVISORY SERVICES ON HIS FORM U4. Status: Final Sanction Detail: FINE PAID ON NOVEMBER 20, 2008 Summary: THE FIRM CONSENTED TO THE ENTRY OF THE ORDER & THE FINDINGS OF FACTS & CONCLUSIONS OF LAW RELATED TO THE FAILURE TO REQUIRE TWO AGENTS OF AN INDEPENDENT FINANCIAL ADVISOR ASSOCIATED WITH APPLICANT'S NETWORK TO OBTAIN REGISTRATION AND LICENSING EXAMS PRIOR TO PROVIDING INVESTMENT ADVISORY SERVICES IN TEXAS. THE FIRM FAILED TO ENFORCE A SYSTEM REASONABLY DESIGNED TO ACHIEVE COMPLIANCE WITH THE BOARD RULES AND THE TEXAS SECURITIES ACT INVOLVING INVESTMENT ADVISER AGENT REGISTRATION AND FAILED TO DISCLOSE ONE AGENT'S OUTSIDE BUSINESS ACTIVITY INVOLVING INVESTMENT ADVISORY SERVICES ON HIS FORM U4.

Allegations: THE SECRETARY OF STATE OF MISSISSIPPI ISSUED A NOTICE OF INTENT TO IMPOSE ADMINISTRATIVE PENALTIES AND TO SUSPEND THE FIRM'S REGISTRATION ALLEGING THAT A FORMER REGISTERED REPRESENTATIVE OF THE FIRM VIOLATED RULE 523(3) IN 2003 WHEN HE MADE A RECOMMENDATION TO A 90-YEAR OLD CLIENT TO PURCHASE A PROMISSORY NOTE AND AGAIN IN 2004 WHEN HE RECOMMENDED SHE CONVERT THE PROMISSORY NOTE TO PREFERRED STOCK. THE STATE FURTHER ALLEGED THAT THE FIRM UNREASONABLY VALUED THE INVESTMENT ON THE CLIENT'S ACCOUNT STATEMENT AND FAILED TO EFFECTIVELY SUPERVISE THE REGISTERED REPRESENTATIVE TO PREVENT THE SALE OF UNSUITABLE PRODUCTS AS ALLEGED. Status: Final Sanction Detail: A CHECK DATED 04/03/2014 IN THE AMOUNT OF $35,000.00 WAS SUBMITTED IN PAYMENT OF A $25,000.00 ADMINISTRATIVE PENALTY AND $10,000.00 TO REIMBURSE THE COSTS OF THE STATE'S INVESTIGATION. Summary: IN CONNECTION WITH THE DIVISION'S INVESTIGATION, THE DIVISION ACKNOWLEDGED THE EXISTENCE OF MITIGATING FACTORS AND CORRECTIVE ACTIONS THAT WERE IMPLEMENTED BY THE FIRM IN 2009-2010 AND THAT THE FIRM UNCONDITIONALLY TENDERED TO THE ESTATE OF THE CUSTOMER THE SUM OF $75,000.00 AS PARTIAL REIMBURSEMENT OF THE LOSSES ON THE SUBJECT INVESTMENTS. THE DIVISION CONCLUDED THAT THE FIRM, ACTING THROUGH THE RR, VIOLATED RULE 521(A)(3) IN CONNECTION WITH THE ALLEGEDLY UNSUITABLE RECOMMENDATIONS, AND FURTHER CONCLUDED THAT THE FIRM FAILED TO REASONABLY SUPERVISE THE RR BY ALLOWING THE CUSTOMER TO PURCHASE AND HOLD THE ALLEGEDLY UNSUITABLE INVESTMENTS. WITHOUT ADMITTING OR DENYING ANY OF THE FINDINGS OF FACT, ALLEGATIONS, ASSERTIONS OR CONCLUSIONS, ON MARCH 19, 2014, THE FIRM AGREED TO THE DIVISION'S ENTRY OF AN ADMININSTRATIVE ORDER, AGREED TO PAY AN ADMINISTRATIVE PENALTY OF $25,000.00, AND AGREED TO REIMBURSE THE DIVISION'S COST OF INVESTIGATION IN THE AMOUNT OF $10,000.00.

Allegations: RECOMMENDATION OF THE SALE OF CLASS B MUTUAL FUND SHARES TO RETAIL CUSTOMERS WITHOUT DISCLSOURE THAT CLASS A SHARES WOULD HAVE PRODUCED HIGHER RETURNS BECAUSE OF THE AVAILABILITY OF BREAKPOINTS AND LOWER ANNUAL EXPENSES Status: Final Sanction Detail: DISGORGEMENT IN THE AMOUNT OF $36,170, PLUS PREJUDGMENT INTEREST PAID REGISTERED REPRESENTATIVE. Summary: INITIAL DECISION BY CAROL FOX FOELOCK, ADMINSITRATIVE JUDGE, ISSUED ON FEBRUARY 15, 2005, DISMISSING THE ADMINSITRATIVE PROCEEDING AS TO MR. KISSINGER. SEC APPEALED TO THE COMMISSION. THE COMMISSION HEARD THE APPEAL ON NOVEMBER 14, 2005, AND ISSUED ITS OPINION AND ORDER ON JULY 11, 2006.

Allegations: NASD RULE 6955(A)- FIRM FAILED TO TRANSMIT REPORTABLE ORDER EVENTS TO THE ORDER AUDIT TRAIL SYSTEM OVER 849 BUSINESS DAYS. Status: Final Sanction Detail: WITHOUT ADMITTING OR DENYING THE FINDINGS, THE FIRM CONSENTED TO THE DESCRIBED SANCTIONS AND TO THE ENTRY OF FINDINGS; THEREFORE, THE FIRM IS CENSURED AND FINED $65,000. FINE PAID VIA WIRE ON APRIL 22, 2009.

Allegations: SECURITIES EXCHANGE ACT OF 1934 RULE 17A-3, FINRA RULES 3730(A), 6730(C)(8) - SMH CAPITAL INC. N/K/A SANDERS MORRIS HARRIS INC. FAILED TO ACCURATELY REPORT THE EXECUTION TIMES OF TRANSACTIONS IN CORPORATE DEBT SECURITIES AND FAILED TO TIMELY REPORT THE TRANSACTIONS IN TRADE REPORTING AND COMPLIANCE ENGINE (TRACE)-ELIGIBLE SECURITIES TO TRACE WITHIN 15 MINUTES OF EXECUTION. THE FIRM INACCURATELY REPORTED THE EXECUTION TIME FOR SOME OF THE TRANSACTIONS IN ITS ORDER MEMORANDA. Status: Final Sanction Detail: WITHOUT ADMITTING OR DENYING THE FINDINGS, THE FIRM CONSENTED TO THE DESCRIBED SANCTIONS AND TO THE ENTRY OF FINDINGS; THE FIRM WAS CENSURED AND FINED $10,000. FINE PAID ON 04/05/2012. Summary: DURING THE PERIOD APRIL 1, 2009 THROUGH JUNE 30, 2009, THE FIRM FAILED TO ACCURATELY REPORT THE EXECUTION TIMES FOR 137 TRANSACTIONS IN CORPORATE DEBT SECURITIES AND FAILED TO TIMELY REPORT ALL 137 TRANSACTIONS TO TRACE WITHIN 15 MINUTES OF EXECUTION. THE FIRM ALSO INACCURATELY REPORTED THE EXECUTION TIMES FOR 70 OF THE 137 TRANSACIOTNS IN ITS ORDER MEMORANDA.

Allegations: FINRA RULE 2010, NASD RULES 2110, 2210 - REGISTERED REPRESENTATIVES OF SANDERS MORRIS HARRIS, INC. DISTRIBUTED PIECES OF HEDGE FUND ADVERTISING MATERIAL TO RETAIL CUSTOMERS THAT FAILED TO DISCLOSE RISKS ASSOCIATED WITH INVESTING IN HEDGE FUNDS, CONTAINED CHARTS OR GRAPHS THAT WERE UNCLEAR AND OMITTED MATERIAL INFORMATION, CONTAINED MISLEADING STATEMENTS THAT WERE PROMISSORY OF POSITIVE FUTURE RETURNS, IMPLIED THAT NEGATIVE RETURNS COULD BE AVOIDED AND/OR IMPLIED THAT PAST PERFORMANCE IS INDICATIVE OF FUTURE POSITIVE RETURNS. THE FIRM DISTRIBUTED TWO OF THE SUBJECT ADVERTISING PIECES TO RETAIL CUSTOMERS WITHOUT PRINCIPAL REVIEW. Status: Final Sanction Detail: WITHOUT ADMITTING OR DENYING THE FINDINGS, THE FIRM CONSENTED TO THE DESCRIBED SANCTIONS AND TO THE ENTRY OF FINDINGS; THEREFORE, THE FIRM IS CENSURED AND FINED $75,000. FINE PAID ON 7/19/2012. Summary: A REVIEW OF 148 HEDGE FUND COMMUNICATIONS WITH THE PUBLIC DISTRIBUTED BY THE FIRM DURING THE PERIOD OF JANUARY 1, 2008 THROUGH DECEMBER 31, 2008, REVEALED THAT NINE OF SUCH PIECES FAILED TO DISCLOSE RISKS ASSOCIATED WITH INVESTING IN HEDGE FUNDS, CONTAINED CHARTS AND GRAPHS THAT WERE UNCLEAR, OR MADE MISLEADING OR EXAGGERATED CLAIMS, PRESENTATIONS STATEMENTS OR DESCRIPTIONS. TWO OF SUCH PIECES WERE NOT APPROVED BY A PRINCIPAL PRIOR TO USE.

Allegations: SECURITIES EXCHANGE ACT RULES 15C3-1, 17A-3, 17A-11, FINRA RULES 2010, 2360, NASD RULES 2110, 2860, 3010, 3011(A), 3011(B), 3011(C), 3110, MSRB RULE G-41 - SANDERS MORRIS HARRIS INC., ACTING THROUGH TWO PRINCIPALS, FAILED TO REASONABLY SUPERVISE A REGISTERED REPRESENTATIVE. THE PRINCIPALS FAILED TO ADEQUATELY IMPLEMENT THE REPRESENTATIVE'S HEIGHTENED SUPERVISION PLAN, IN THAT THEY FAILED TO PRE-APPROVE LOW-PRICED EQUITY TRANSACTIONS EXECUTED BY HIM AND FAILED TO EVIDENCE THEY HAD CONTACTED HIS CUSTOMERS ON A QUARTERLY BASIS AS REQUIRED BY THE HEIGHTENED SUPERVISION PLAN. THE FIRM FAILED TO ESTABLISH AND MAINTAIN A REASONABLE SUPERVISORY SYSTEM TO SUPERVISE THE OPTIONS TRADING EFFECTED BY ITS REGISTERED REPRESENTATIVES AT A BRANCH OFFICE. THE FIRM ALLOWED ITS BRANCH OFFICE, AT WHICH MORE THAN THREE REGISTERED REPRESENTATIVES WERE LOCATED, TO TRANSACT AN OPTIONS BUSINESS WHILE THE PRINCIPAL SUPERVISOR WAS NOT QUALIFIED AS EITHER A REGISTERED OPTIONS PRINCIPAL OR A LIMITED PRINCIPAL-GENERAL SECURITIES SALES SUPERVISOR. THE FIRM, ACTING THROUGH ITS ANTI-MONEY LAUNDERING (AML)COMPLIANCE OFFICER (AMLCO), FAILED TO ESTABLISH AND MAINTAIN AN ADEQUATE AML COMPLIANCE PROGRAM (AMLCP) TO DETECT AND IDENTIFY POTENTIAL RED FLAGS FOR SUSPICIOUS ACTIVITY. THE FIRM MAINTAINED CLEARING AGREEMENTS WITH FOUR CLEARING PLATFORMS, BUT FAILED TO DOCUMENT ANY REVIEW OF EXCEPTION REPORTS TO DETECT AND IDENTIFY POTENTIAL RED FLAGS FOR SUSPICIOUS ACTIVITY FROM THREE OF THE FOUR CLEARING PLATFORMS. THE FIRM'S AMLCP REVIEWS WERE FOCUSED ON THE ACTIVITY CONDUCTED THROUGH ONLY ONE CLEARING PLATFORM. THE FIRM'S AMLCO DID NOT HAVE ACCESS TO THE TRADING ACTIVITY OR EXCEPTION REPORTS TO REVIEW FOR SUSPICIOUS ACTIVITY ACROSS THREE OUT OF FOUR TRADING PLATFORMS, AND DID NOT PERFORM ANY MANUAL REVIEW OF ACTIVITY OCCURRING IN THESE PLATFORMS, LEAVING APPROXIMATELY 40% OF THE FIRM'S BUSINESS THAT WAS NOT SUBJECT TO REVIEW. ACCORDINGLY, THE FIRM, ACTING THROUGH ITS AMLCO, DID NOT IMPLEMENT AN ADEQUATE SYSTEM TO REVIEW FOR SUSPICIOUS ACTIVITY. THE FIRM, ACTING THROUGH ITS AMLCO, FAILED TO IMPLEMENT THE FIRM'S POLICIES AND PROCEDURES REGARDING DUE DILIGENCE FOR CORRESPONDENT ACCOUNTS FOR FOREIGN FINANCIAL INSTITUTIONS. THE FIRM'S PROCEDURES PROVIDED THAT CORRESPONDENT ACCOUNTS FOR FOREIGN FINANCIAL INSTITUTIONS WERE TO BE FORWARDED TO THE AMLCO FOR REVIEW UPON ACCOUNT OPENING. THE FIRM'S WRITTEN SUPERVISORY PROCEDURES (WSPS)STATED THAT THE AMLCO WAS RESPONSIBLE FOR IDENTIFYING CORRESPONDENT ACCOUNTS FOR FOREIGN FINANCIAL INSTITUTIONS AND CONDUCTING THE REQUIRED DUE DILIGENCE. THE FIRM HAD FAILED TO MAINTAIN ADEQUATE DOCUMENTATION EVIDENCING THE IDENTIFICATION AND PERFORMANCE OF DUE DILIGENCE ON ITS FIVE CORRESPONDENT ACCOUNTS FOR FOREIGN FINANCIAL INSTITUTIONS. THE FIRM, ACTING THROUGH ITS AMLCO, FAILED TO CONDUCT AN ADEQUATE TESTING OF ITS AMLCP. THE TESTING FAILED TO INCLUDE REVIEWS FOR CUSTOMER IDENTIFICATION PROGRAM COMPLIANCE AND FAILED TO REVIEW THE ADEQUACY OF ITS SUSPICIOUS ACTIVITY MONITORING PROGRAM; THE TEST RESULTS DID NOT EVEN INCLUDE A FINDING THAT IT FAILED TO MONITOR FOR SUSPICIOUS ACTIVITY OR POTENTIAL RED FLAGS OF CUSTOMER ACCOUNTS HELD AT THREE OF ITS CLEARING PLATFORMS. THE FIRM FAILED TO FILE A REPORT OF FOREIGN BANK AND FINANCIAL ACCOUNTS FOR A CALENDAR YEAR AND FILED ITS REPORT FOR THE FOLLOWING YEAR AFTER THE DEADLINE FOR ITS ONE FOREIGN BANK ACCOUNT. FINRA CONVEYED TO THE FIRM THAT A PROPOSED CREDIT AGREEMENT BETWEEN A BANK AND THE FIRM'S PARENT COMPANY PLEDGED THE ASSETS OF ITS SUBSIDIARIES WHICH CAUSED A NET CAPITAL CHARGE TO THE FIRM AND IT SHOULD HAVE NOTED THE ENTIRE AMOUNT BORROWED AS A LIABILITY FOR CALCULATING ITS NET CAPITAL REQUIREMENT SO THAT IT DID NOT ACCURATELY CALCULATE AND REPORT ITS NET CAPITAL REQUIREMENT FOR MORE THAN 18 MONTHS. THE PARENT COMPANY ACTED TO ALLEVIATE THE FIRM OF THE FINANCIAL OBLIGATIONS AND INCREASE ITS NET CAPITAL POSITION AND BRING IT OUT OF NET CAPITAL DEFICIENCY AND BRING IT INTO COMPLIANCE. Status: Final Sanction Detail: WITHOUT ADMITTING OR DENYING THE FINDINGS, THE FIRM CONSENTED TO THE DESCRIBED SANCTIONS AND TO THE ENTRY OF FINDINGS; THEREFORE, THE FIRM IS CENSURED AND FINED $150,000, $50,000 PERTAINS TO AN MSRB RULE VIOLATION, AND $25,000 IS JOINTLY AND SEVERALLY. FINE PAID ON 8/15/2012.

Allegations: FINRA RULES 2010, 7450, NASD RULE 3010 - SANDERS MORRIS HARRIS INC. FAILED TO TRANSMIT REPORTABLE ORDER EVENTS (ROES) TO THE ORDER AUDIT TRAIL SYSTEM (OATS) ON NUMEROUS BUSINESS DAYS. THE FIRM'S SUPERVISORY SYSTEM FAILED TO DESIGNATE AN APPROPRIATELY REGISTERED PRINCIPAL(S) WITH AUTHORITY TO CARRY OUT THE SUPERVISORY RESPONSIBILITIES WITH RESPECT TO OATS SUPERVISION. THE FIRM FAILED TO PROVIDE DOCUMENTARY EVIDENCE THAT DURING THE REVIEW PERIOD IT PERFORMED THE SUPERVISORY REVIEWS SET FORTH IN ITS WRITTEN SUPERVISORY PROCEDURES CONCERNING OATS REPORTING. Status: Final Sanction Detail: WITHOUT ADMITTING OR DENYING THE FINDINGS, THE FIRM CONSENTED TO THE DESCRIBED SANCTIONS AND TO THE ENTRY OF FINDINGS; THEREFORE, THE FIRM IS CENSURED, FINED $50,000 AND REQUIRED TO REVISE ITS WRITTEN SUPERVISORY PROCEDURES REGARDING OATS SUPERVISION AND OATS REPORTING WITHIN 30 BUSINESS DAYS OF ACCEPTANCE OF THIS AWC BY THE NAC. FINE PAID ON 01/08/2013.